March 10 2023
- Sacks got a bulldog
- SVB
-
This is like 2008 and Covid
-
We are in the middle of it right now
-
Really acute effects that many companies and founders are dealing with right now - 1000s of companies
-
Worse than 2008 or Covid for Silicon Valley companies
-
Like Lehmann for Silicon Valley
-
Garry Tan comment - this is an extinction level event
-
This is not a Big Tech event - small companies - 10 to 100 employees, 1000s of companies - Little Tech is being hit
-
Regional banking crisis
-
SVB was compliant according to regulators
-
Now everyone is talking about why would you keep money in JP Morgan or top 4 bank
-
So regional banks might suffer a bank run
-
SVB supports 50% of venture backed startup
-
Venture Funds also have money stuck in SVB
-
Billions of dollars frozen
-
Wed letter SVB CEO issued a letter to shareholders
-
Prior to the run - it was a financial solvent business
-
End of 2022
-
Deposits grew a lot over last 2 years
-
But now recently deposits dropped
-
Bond portfolio also declined in value
-
Dec 2022 Seeking Alpha asked if SVB was about to blow up
-
They made $560M profits in 2021 on venture debt - dropped to $140M in 2022
-
- Who is to blame?
- Risk folks at SVB made a huge miscalculation - funds could be called on stuff they had invested for 10 years
- 561 bank failures 2001-2022
- SVB had bad risk management strategy - duration mismatch - invested in long term securities while serving market that is so volatile
- Need to match timing of cash flows - SVB bought 10 year risk in order to pay back money that could be called on a daily or weekly basis
- Hard to adjust fast enough coz they had mark to market assets that got clobbered with rising interest rates
- Weird accounting thing that losses on 10 year bonds/MBS are only accounted for on sale not during mark to market - which is weird
- Venture debt market is clobbered because lender assumes VCs will keep investing and that companies will keep getting up rounds
- This was true in ZIRP environment
- Venture debt should be raised from LPs - not from customer deposits
- SVB is loaning it to people who are depositing it
- Can’t be using customer deposits for PE play, risky loans, warrant coverage, etc
- Venture debt is much like Venture Capital - most of this gain is on paper, most of the gain hasn’t been realized
- SVB said it themselves - the burn rate stayed the same
- Sacks said in every board meeting recently to founders to cut burn (~29 min mark)
- If you have never lived in a bear market, you don’t know how bad it can get
- Deposit banks should be required to keep all deposits in liquid assets
- 2 day ago Powell was asked about systemic risk in the banking system in the rising interest rate environment - and he said “no”
- Yellen is saying they are monitoring the situation
- 3 days ago she was in Ukraine
- SVB made decision to sell their assets at loss because their deposits went down because VCs and startups failed to cut burn - they were spending a lot
- You might have been working on something like climate change, etc - did the right thing, big warchest, good burn rate - all compromised because of other people’s mistakes
- Companies had money in money market funds - safest stuff - by blackrock, morgan stanley - tens of millions - all compromised - CA regulator stepped in and froze everything
- Only get $250K - else you get a certificate for use in bankruptcy - coz ur assets are owned by SVB in blackrock/morgan stanley investments
- Could take months to get even 70c on the dollar - that is big hit
- But who is the buyer - sharpest sharps on wall street who will get big discount - so better for Fed to warehouse that risk
- This will torch years of US innovation - and regulators cannot let this happen
- Second order effects
- Payment processors (kinda like Rippling?) are hit so they can’t pay their customers
- Say Stripe can’t pay some ecommerce vendor in Arizona - so contagion effect is bad
- SVB was an on ramp for US people to get money into China
- Chinese startups would raise money from US investors using banks like SVB
- So hurting Chinese startups too - this complicates Great Power Conflict
- TARP returned a $15B profit to american people
- People saying bank run is a panic - its not irrational actually, its actually rational
- If government doesn’t step in this weekend it could spark on a run on the regional banking system
- Customer deposits are not a place where people expect to lose money
- Using customer deposits and use in risky non liquid investments is terrible
- Crazy that you can set up a bank account to write checks and lose all the money because the bank lost the money in mortgage backed securities, etc
- The customers’ mistake is they used a top 20 bank that was under regulatory compliance? This is so unfair
- Effect on VCs
- Chilling effect
- VC funds cannot pay their employees, etc
- A lot of shutdowns are going to get accelerated
- VCs will pick winners
- Dark times
- $42B of withdrawals on March 9 2023 after announcing on March 8 2023 that they lost money by selling some MBS type investments - and had negative $958M cash
- Silicon Valley herd mentality drove everyone to withdraw money maybe - the network is very connected
- Rational upside-downside action
- Game theory - you don’t want to wait to be the last one to leave - downside of taking money out is zero - downside of leaving it in is bad
- Every single VC basically custodies funds at SVB
- iShares Regional Bank ETF has crashed
Comments